What Happens if I Don't Reaffirm My Mortgage After Bankruptcy?

By River Braun, J.D.

What Happens if I Don't Reaffirm My Mortgage After Bankruptcy?

By River Braun, J.D.

In a bankruptcy case, a reaffirmation agreement waives the discharge that a debtor may be entitled to receive for an eligible debt. In other words, when you reaffirm a debt, you promise to pay the debt even though you filed for bankruptcy relief.

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Read on to learn about the pros and cons of reaffirmation agreements and what happens if you choose not to reaffirm your mortgage after declaring bankruptcy.

Reaffirmation Agreement Defined

A reaffirmation agreement is a legally binding agreement between you and a secured creditor. In the case of a mortgage, the agreement is between you and the mortgage lender. The agreement states that you agree to pay a loan under the same terms and conditions of its original contract. If your home is destroyed or the lender forecloses due to non-payment or other breaches of contract, you promise to pay the debt owed after insurance or a foreclosure sale.

Bankruptcy laws require debtors to surrender, redeem, or reaffirm secured debts, including mortgages and car loans. However, your mortgage company may not push the issue if you continue making your mortgage payments on time.

If you do not reaffirm the mortgage, your personal liability for paying the debt represented by the promissory note is discharged in your bankruptcy case. However, your lender retains a lien on your home through the mortgage. The company can foreclose the mortgage and force a foreclosure sale if you stop making payments. In some cases, the mortgage lender may agree to negotiate some of the terms of the loan to help you afford to keep your home, but it is under no legal obligation to do so.

Pros and Cons of Reaffirmation Agreements

When you reaffirm a mortgage, the mortgage company typically resumes many of the activities that it may have ceased when you filed your bankruptcy petition. For example, the company should resume sending monthly statements and reporting your payments to the credit reporting agencies. The lender should also allow you to pay your mortgage online or resume monthly drafts if you desire.

However, reaffirming a mortgage has some disadvantages. The biggest disadvantage is that you can be held liable for the entire mortgage balance if you fall behind on your payments.

Also, if your house goes into foreclosure, you may be required to pay a deficiency. When a lender sells a home at a foreclosure auction, any balance remaining on the account after applying the proceeds is called a deficiency. When you sign a reaffirmation agreement, the lender can obtain a deficiency judgment stating that you owe this money. Without a reaffirmation agreement, the lender cannot hold you responsible for the deficiency balance.

Choosing to Sign a Reaffirmation Agreement

After weighing the advantages and disadvantages of a reaffirmation agreement, it is your choice whether you want to sign an agreement with your mortgage lender. If you do not sign a reaffirmation agreement, it is unlikely that a company will begin foreclosure proceedings as long as you remain current on your mortgage payments and do not breach other terms of the mortgage note, such as keeping the home insurance and paying property taxes. Most mortgage companies want to avoid foreclosure if possible.

Do you still have questions about your mortgage rights during bankruptcy? Get more answers here.

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